Quote of the week: Thatcher, monetarism and Marx’s reserve army

Following the last two weeks’ quotes from an interesting chapter by Fabio Petri, this is the third and final extract in this ‘mini’ series. It includes a revealing statement by a top Treasury civil servant under Margaret Thatcher in the 1980s, which saw a severe recession and the return of mass unemployment, topping three million by the middle of the decade, justified by the need bring down inflation.

The use of incomes policies involving negotiations between government, employers and trade unions to limit wage rises and mitigate the wage-price spiral of the time had largely broken down and the new government declared that the monetarist policies championed by Milton Friedman were the only way to do it. But the quote below reveals that Thatcher, rather than strongly adhering to monetarism, saw mass unemployment as an effective way of weakening the power of organised labour and its wage demands.

Inflation did come down, not just due to the renewed weakness of the working class, but also due to the sharp fall in the price of oil and other commodities on global markets, caused by recession across many of the world’s advanced economies. These developments came at great cost, and one must still wonder whether there could have been an alternative to the economic and social brutalities they engendered. Thatcher had declared not, an attitude exemplified by her famous TINA (There Is No Alternative) slogan. The reappearance of what Marx called the ‘reserve army’ of the unemployed, and the end of the post war policy commitment to full employment had been predicted by Michal Kalecki back in 1943.

“The 1970s witnessed the end of the Golden Age. Palma (sic) reports a declaration by Sir Alan Budd (a top civil servant at the British Treasury under Thatcher, and later Provost of Queen’s College, Oxford) on the real reasonings behind the Thatcher government’s use of neoclassical monetarist arguments to justify its brutal restrictive monetary policy:

The Thatcher government never believed for a moment that [monetarism] was the correct way to bring down inflation. They did however see that this would be a very good way to raise unemployment. And raising unemployment was an extremely desirable way of reducing the strength of the working classes…What was engineered – in Marxist terms – was a crisis of capitalism which re-created the reserve army of labour, and has allowed the capitalists to make high profits ever since.”

Fabio Petri (2023), Class struggle and hired prize-fighters, in J. Eatwell, P. Commendatore and N. Salvadori (eds.), Classical Economics, Keynes and Money, Abingdon: Routledge, p.58.

Avoiding a recession: the Fed conundrum

LevyInstituteThe Levy Economics Institute has published their annual Strategic Analysis paper on the current state of, and prospects for, the US economy, which is always an interesting read. The Institute is non-partisan, but much of its research and output takes its inspiration from two great post-Keynesian economists of the past: Hyman Minsky and Wynne Godley, who both emphasised the importance of aggregate demand to the state of the economy, in the short run and the long run, and the interaction of real and financial factors.

A summary of this short paper can be found here, and the pdf can be downloaded here.

As the paper notes, the US recovery from the pandemic-triggered recession has been swift, with GDP now above its pre-pandemic level, and the employment rate almost there, thanks in large part to the extraordinary scale of the fiscal stimulus enacted by the government. However, it has also been associated with a deteriorating current account deficit and a rise in inflation. Continue reading

Inflation, the supply-demand debate and the policy response

BankofEnglandAs central banks around the world tighten monetary policy by raising interest rates in order to restrict demand, there remains an ongoing debate about whether this is the right response to the current inflation.

A large share of the inflation in many countries has been caused by supply shocks, as much of the world went through and then emerged from pandemic lockdowns, and as a consequence of the war in Ukraine. Taken together, these two have restricted the supply and thus increased the cost of food and energy on global markets. But there have also been impacts from the demand side, as many governments supported their economies with major fiscal stimuli during and after the lockdowns. The scale of these varied across countries, with the economic impact varying as a result. The US stimulus was particularly large and has helped restore its collapsed employment rate to the pre-pandemic level in recent weeks. However it is also arguable that this dramatic boost to demand has helped to fuel inflation. EU countries tended to be less ambitious fiscally, with the supply shocks contributing a greater share of the rise in inflation there than they have done in the US. The current inflation varies between countries, with Japan seeing a much smaller increase given its structurally weak demand and its historic struggles with deflation and weak growth in recent decades.

One of the big questions that has fuelled much debate in the media, not least on Twitter, is whether central banks need to be raising interest rates, which their own models say will only fully affect the rate of inflation a year or two down the line, when the global economy has begun to slow and forecasts of recession are becoming more frequent. If the very purpose of monetary tightening is to reduce demand in the form of investment and consumption and raise unemployment, which economists tend to think of as socially undesirable even if they may sometimes be intentional consequences of policy, the question arises as to whether such moves are necessary. Continue reading

Joseph Stiglitz on what to do about the present inflation — via LARS P. SYLL

To be sure, some normalization of interest rates would be a good thing. Interest rates are supposed to reflect the scarcity of capital, and the “correct” price of capital obviously is not zero or negative – as near-zero interest rates and very negative real (inflation-adjusted) interest rates would seem to imply. But there are substantial […]

What to do about the present inflation — LARS P. SYLL

Robert Reich on big oil profits, inflation and imposing a windfall tax

The latest video from Robert Reich’s Inequality Media on the soaring profits of the big oil companies and how they should be taxed to ease the cost of living crisis in the US. As he notes, the UK government has recently enacted such a policy to help households with their energy bills, and may have to go further as the price of energy continues to rise.

What is really going on? — Real-World Economics Review Blog

by Yanis Varoufakis

. . . what is really going on? My answer: A half-century long power play, led by corporations, Wall Street, governments and central banks, has gone badly wrong. As a result, the West’s authorities now face an impossible choice: Push conglomerates and even states into cascading bankruptcies, or allow inflation to go unchecked. […]

What is really going on? — Real-World Economics Review Blog

A paradox of inflation: supply shocks can be caused by excess demand

InflationMartin Wolf of the Financial Times made an important point with regard to the causes of inflation in last week’s economics commentary. His article drew on the latest Annual Report of the Bank for International Settlements. I will quote him in full:

“Explaining away what is happening as due to “exogenous” supply shocks is a big error. What is exogenous to any one economy is often endogenous to all of them. Thus, rapidly expanding demand in a number of significant economies will create a surge in global demand…excess demand will always show up first where prices are flexible, notably in commodities, before spreading.”

Thus today’s high inflation in many economies is not wholly the result of supply shocks due to pandemic-related supply-chain issues and war in Ukraine. It is also, in part, the result of excess global demand. Continue reading

Inflation: should we take away the soup bowl? — Real-World Economics Review Blog

The graph below has been constructed by economists of the European Central Bank. It’s based on national accounts data. It shows that present day inflation is profit driven, not wage driven. Money flows to profits, not wages. What does this mean for monetary, fiscal and income policy, taking some other aspects of inflation into consideration? […]

Inflation: should we take away the soup bowl? — Real-World Economics Review Blog

The UK is the new ‘sick man of Europe’: an interview with Duncan Weldon

For those of you interested in the current performance and prospects of the UK economy, here is an interesting and wide-ranging interview with Duncan Weldon, a former economist at the Trades Union Congress, and a former economics editor for the BBC’s flagship programme Newsnight. He now writes the Value Added newsletter. During the interview he discusses the UK’s poor performance in recent years, and how this has been impacted by government policies, as well as the international environment, including our evolving relationship with the European Union. He ends on a (sort of) optimistic note, in that the fact that UK productivity is some 20 percent behind that of countries such as France and the US means there is plenty of room for living standards to ‘catch up’ with those of more successful economies.

The scissors of slump — Michael Roberts Blog

Last week, US Treasury Secretary Janet Yellen told the US Congress that “We now are entering a period of transition from one of historic recovery to one that can be marked by stable and steady growth. Making this shift is a central piece of the President’s plan to get inflation under control without sacrificing the […]

The scissors of slump — Michael Roberts Blog